Juggling Dynamite

The Federal Reserve escalated its warnings about the perils of risky borrowing by businesses Monday, saying firms with the worst credit profiles are the ones taking on more and more debt.

“The historically high level of business debt and the recent concentration of debt growth among the riskiest firms could pose a risk to those firms and, potentially, their creditors,” the Fed said.  Here is a direct video link.

Also see: Fed’s Powell says financial risks are moderate; these charts don’t agree.

While the Fed is warning on credit risk, as usual, they have enabled it and have no plan to help deflate the problem.  After keeping policy rates near the zero bound for years, the Fed has paused hiking plans at a base rate of just 2.5% heading into an economic downturn.  There is no cavalry available to fight the next recession.

Extremely inflated pricing in Canadian real estate has led to affordability strain for most of the population around major urban areas. We should not be surprised to see social unrest and demands for higher property taxes over the months ahead.

After fifteen years of goosing demand and prices with debt, the problems cannot be fixed by throwing even more debt and further government ‘stimulants’ at it.  While negative for present owners (myself included), lower prices are an important part of the solution needed.  At the same time, the price compression now underway will ripple through an economy which became unduly concentrated on a rising real estate sector over the last decade.  The easy money tab will now exact payment with interest.  See Toronto’s condo boom will end, dragging the economy down with it:  Capital Economics.  Also see:  Rally against housing unaffordability on Vancouver’s billionaire row:

A group of activists descended on an exclusive street in Vancouver’s Point Grey neighbourhood Saturday to protest wealth inequality in the city and a housing crisis that has left many struggling to put a roof over their head.

A surge in real estate wealth over the past decade has made those who live on Belmont Avenue the owners of some of the most expensive properties in British Columbia. The 10 most expensive homes on one block alone add up to a whopping $362 million in value. Here is a direct video link.

As we think about these issues, it’s important to appreciate that money laundering costs civil society in many ways including the support and prevalence of criminal organizations/activities, lost tax revenues, as well as elevated property prices causing regular households to spend more on housing and sign on to years of extra debt payments (and reduced saving ability) to put a roof overhead.  Who remembers when gambling was recognized as socially damaging and hence illegal in most jurisdictions?

BC Attorney General David Eby speaking on money laundering at the North Cove Advisors Vancouver Housing Conference, April 23, 2019. Here is a direct video link.